A Conversation with Tania Brown

Cultivating Financial Wellness

by P.E. Kelley

Mr. Kelley is managing editor of this magazine. Connect with him by e-mail: pkelley@lifehealth.com

In a groundbreaking and ambitious study that sought to determine levels of ‘financial wellness’ among employees, the firm Financial Finesse, which provides wellness programs to the workplace, exposed some alarming disparities of financial stress within different ethnic groups.

The study, Optimizing Financial Wellness Programs for a Diverse Workforce, determined that cultural influences play a key role in determining one’s ‘financial wellness.’

Tania Brown, CFP, is a Resident Financial Planner at Financial Finesse and the Lead Researcher for Diversity Issues in the Financial Wellness Think Tank. She is a veteran of the United States Army whose favorite assignment was teaching cadets how to navigate through a grenade assault course. Her desire to help people navigate through challenging situations, particularly financial ones, led her to become a financial planner.

We spoke with Tania about the report’s scope within cultural and generational segments, and it’s implications for advisors trying to bring meaningful financial solutions into the workplace.

PEK: What was the genesis of the Financial Wellness Report?
TB: We’ve been observing the disparity between ethnic groups in our research for some time. As we increased our sample size, we noticed the trends held and wanted to investigate it further.

The Fortune 1000 companies we work with work hard to create a diverse workforce – a key component to business success in a global marketplace – and we want to help them optimize their customized workplace financial wellness programs so all employees succeed.

On the personal side, our mission at Financial Finesse is building a financially healthy society, and I have always been passionate about helping people become financially well. One of the ways our company fulfills this mission is by publishing reports highlighting employee financial trends compiled through analysis of data collected anonymously from users of our workplace financial wellness programs.

These research reports examine changes in the financial wellness landscape to help provide best practices in helping organizations increase their employees’ financial wellness. As our Think Tank team reviewed the research we noticed a trend in the scores of employees in different ethnic groups.  In particular, I started noticing the disproportionate trend toward lower financial wellness scores in my own ethnic demographic. We developed a working group to further examine financial wellness for different ethnic groups to develop best practices to optimize financial wellness for a diverse workforce.

PEK: How do you define financial wellness?
TB: Financial wellness is a state of financial well-being where a person maintains:
• A manageable level of financial stress;
• A lifestyle at or below their financial means;
• A strong financial foundation including adequate emergency savings, no high-interest debt, and a sufficient insurance and estate plan to protect assets, income, and loved ones; and
• An ongoing plan to achieve future financial goals

A person who is financially well makes good financial decisions, has a higher level of satisfaction with their current financial situation and a greater level of freedom to pursue life on their own terms.

PEK: How do you define ‘financial stress’?
TB: Financial stress is stress caused by financial needs. Having some financial stress is annoying or frustrating, but it’s normal in modern America and it’s manageable. Unmanageable financial stress levels, which we define as those who report their financial stress as “high” or “overwhelming,” reflect a sense that one’s finances are out of control, and that there is little hope for turning things around.

Generally, these employees with unmanageable financial stress are living from paycheck to paycheck, with expenses exceeding their income and/or with large debt balances, no emergency savings and inadequate insurance. One unexpected and expensive event, such as a period of unemployment, a medical emergency, or a car accident, a death in the family, or divorce can cause a cascading event of negative financial consequences for those who are unprepared.
In our research, we found that 31 percent of African American employees and 25 percent of Hispanic employees reported unmanageable levels of financial stress, compared to 19 percent of Caucasian employees and 12 percent of Asian employees

PEK: What did the research reveal about disparities in financial behavior?
TB: We studied the financial behaviors of four different ethnic groups in the workforce: African American, Hispanic/Latino, Asian American and Caucasian employees. We found that among these four groups, a higher percentage of African American and Hispanic/ Latino employees were more likely to struggle with financial issues that may be keeping them in what we call a “cycle of low financial wellness.”

For example, only 26 percent of African American employees and 37 percent of Hispanic/Latino employees reported having an emergency fund, compared to 55 percent of Caucasian employees and 72 percent of Asian American employees. Only half (52 percent) of African American employees and 64 percent of Hispanic/Latino employees report having a handle on their monthly cash flow (spending less than they earn each month) compared to 77 percent of Caucasian employees and 82 percent of Asian American employees. These two groups were also more likely to suffer from unmanageable levels of financial stress and to feel overwhelmed by the amount of debt they have.

Employees who don’t have a financial reserve and have large debt loads could face a financial crisis in the event of an emergency, and may not be able to save enough for retirement, contribute to education expenses and build a legacy to leave to their families one day.

PEK: What cultural influence have you identified that impact the level of financial among ethnic groups?
TB: The disparity among the ethnic groups is rooted in the financial behaviors that we consider critical to being financially well. Even when you take wage gaps into account, the most overt difference is in these key behaviors, particularly in the area of cash management, where having a handle on cash flow, an emergency savings account, and a plan to pay off debt are critical to getting on the road to financial wellness.

The Financial Wellness Score™ is a measure of aggregate financial behaviors, so what we are noting is that key behavior differences between the groups are responsible for the disparity.

Cultural differences may play into financial behaviors and we looked at outside studies in our report. For example, according to a 2015 report from the National Alliance for Caregiving and the AARP, the majority of caregivers are female, and the prevalence of caregiving is highest among the Hispanic population.

Met Life estimates the cost impact of caregiving on the individual female caregiver in terms of lost wages and Social Security benefits at over $324,000. Employers who are aware of this may offer flexible work hours to accommodate employee caregiving and extend benefits like access to group long term care insurance to employee families.

PEK: The study identifies management of ‘cash flow’ as a crucial habit to develop. How do you teach that?
TB: Cash flow management refers to managing income, and it is a critical financial skill. Successful cash management means you are mindful of how much is coming in, and make mindful decisions on how much is going out and where it goes.
As we wrote in our report, “Americans are woefully underprepared for retirement, but things have been especially challenging for Hispanic and African American employees. Poor cash management has hindered their ability to save for retirement, as only one in five (20 percent) of Hispanic employees and 18 percent of African American employees, report being on track for retirement. The lack of cash management may also be hurting college funding, as only 19 percent of Hispanic employees and 17 percent of African American employees indicate saving enough to meet future education goals. The lack of educational funding may lead to higher amounts of student loan debt incurred by children of these underfunded households, thus perpetuating the inability to build and transfer wealth to the next generation.”

We found that African American employees and Hispanic/Latino employees overall reported lower levels of financial wellness and reported lower percentages of behavior attributed to high financial wellness

The first step in managing income is to set intentions for how to spend it, called a «spending plan» or a «budget.» We start by making sure an employee has a clear definition of what a budget is. Preferably it›s written down, either on paper, in a spreadsheet or in expense tracking software (such as Mint.) We explain that this is a great start, but what often busts a budget isn’t the known bills, but all of the other expenses we forget to include.

We work with employees to provide guidance on how to create a budget and coaching on how to use it. For some it’s providing guidance on what tools to use to create a budget, for others it’s explaining budgeting categories and for others it’s providing guidance on an existing budget. As financial coaches we work to meet people where they are — their budgeting preferences (spreadsheet, handwritten, computer program or app), knowledge of budgeting and discipline to find easy ways to help employees consistently set spending goals, live within their means and save for important goals.

PEK: Where, and when, did discrepancies in financial wellness among various ethnic groups begin to appear?
TB: We’ve been observing the disparity between ethnic groups in our research for some time. As we increased our sample size, we noticed the trends held and wanted to investigate it further.

PEK: What role does debt play in hampering one’s ability to start saving?
TB: Debt can hamper one’s ability to start saving. It’s like looking in the rear view mirror all the time while driving. A hyper focus on debt may take away the focus on future wealth-building goals such as buying a home and saving for retirement. A higher percentage of disposable income may be going towards debt, particularly debt with high interest, which leaves less to use towards emergency and retirement. The less going towards savings, the more someone is at risk of being adversely affected by an unexpected financial expense, such as car repair or dental emergency, which may lead to using credit or a 401(k) loan to cover the expense. It’s cumulative. Over time, this can lead to a cycle of low financial wellness, where the employee lags their peers over the career cycle in terms of building a solid financial foundation.

PEK: What are the impacts of low financial wellness among ethnic groups within the workplace?
TB: Financial stress is distracting and unpleasant, and affects both the employees who suffer from it and the companies where they work. If an employee is dealing with the possibility of not being able to pay their mortgage or get their car repaired, chances are that employee is going to be thinking about it while they are at work.

Financial stress and low financial wellness are common. The percentage of employees in the “struggling” (financial wellness scores of 0 – 2 on a 10 scale) and “suffering” (financial wellness scores of 3-4 on 10 scale) is significant, and highest among African American and Hispanic employees.

Low financial wellness relates to behaviors that are wealth stripping vs. wealth building. Low financial behaviors such as a lack of emergency savings, uncomfortable levels of debt, or not having a handle on cash flow leaves a person open to being seriously hampered rather than just inconvenienced by unexpected financial expenses, thus creating a never-ending cycle of debt.

We found that African American employees and Hispanic/Latino employees overall reported lower levels of financial wellness and reported lower percentages of behavior attributed to high financial wellness. The impact for the employee is reflected in our report:  In the 45-54 year old age categories only 18% of African-Americans and 21% of Hispanic Americans report being on target to replace 80% of my income (or their goal) in retirement compared to 31% of Asians and Caucasians. This may lead to delayed retirement or having to rely on their children for financial assistance.

PEK: How are employers affected, and how can they assist their employees to elevate their ‘wellness quotient’?
TB: Per our research, “as the cycle of low financial wellness continues, the effect is felt by employers.” In a previous study, our 2016 ROI Special Report, we found that employees who suffer from overwhelming financial stress or struggle to maintain financial stability tend to incur both immediate and future financial costs for their employer in the form of absenteeism, garnishments, payroll taxes, and delayed retirement. Employees with the lowest levels of financial wellness could cost their employers anywhere from $94 to $198 a year per employee. The good news is that financial wellness scores reflect financial behaviors, and financial behavior can be changed.

Improvements in employee financial wellness can directly impact an employer’s bottom line. As median employee financial health improves, the cost of low financial wellness diminishes. According to our 2016 ROI Special Report, an incremental shift in the median workforce financial wellness score from a 4 to a 6 has the potential to save a large employer of 50,000 employees approximately $5.6 million per year in reduced costs of absenteeism, wage garnishments and payroll taxes.

When the projected reduced cost of health care, delayed retirement and turnover are added to the model, the hypothetical 50,000 employee company that implements a comprehensive workplace financial wellness program according to industry best practices could potentially realize a total cost savings of nearly $28 million.

PEK: You’ve identified a need for a good ‘financial foundation’, such as savings and life insurance. What does the study say about these things with regard to ethnic groups?
TB: We found in our study that African American and Hispanic employees both reported having less saved for emergencies (26 percent of African American employees and 37 percent of Hispanic employees) than Asian employees at 72 percent and Caucasian employees at 55 percent. No emergency savings may mean turning to predatory lending with high interest rates, such as payday or title loans, to cover emergencies.

A lower percentage of African American employees (52 percent) and Hispanic employees (47 percent) reported carrying enough life insurance to replace their income, pay for college expenses and create an emergency fund for beneficiaries compared to 57 percent of Asian employees and 67 percent of Caucasian employees. This lack of adequate insurance may perpetuate the cycle of low financial wellness in the next generation, who must pay final expenses and may be left financially struggling if they depend on the employee’s income for their lifestyle.

PEK: What do you identify as good financial priorities, both for young employees, families and then older employees?
TB: Good financial priorities are the building blocks to sustainable financial wellness. The foundation is similar for young employees, families and older adults. It starts with:

  • a budget to manage spending and to live below one’s means
  • adequate insurance (health, property, disability income, life)
  • at least 3-6 months of expenses saved for emergencies
  • contributing enough to earn your company’s match in your 401k plan; and
  • paying off high interest debt

Once the foundation is in place then the priorities shift to financial goals, which will vary depending on someone’s stage of life. A younger employee may focus on saving for a home, families may focus on saving for their kid’s college education and older employees, now free from having to support their children, may boost their retirement plan savings.

PEK: What are the hidden costs of ‘low financial wellness’?
TB: A cycle of low financial wellness is synonymous with poor financial wellness behaviors that continue throughout one’s working career, ultimately making it difficult for employees to move ahead in achieving their financial goals.

These behaviors include living above one’s means, not having money saved for emergencies and not having a plan for future goals such as retirement or saving for children’s college education. Not achieving these goals creates a cycle for employees – one that may cause their children to have to take on college debt or need to support a parent financially later in life, causing financial stress and impacting a second generation’s ability to become financially well.

This is what we mean by a cycle of low financial wellness. It’s something that perpetuates far beyond the individual. The good news is that employees can take control of their situations at any point to stop it. ◊